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Rising repo rate battering affordable property sector

MAIN IMAGE: Vuyiswa Ramokgopa, Chairperson of the NPPC 

Homeowners, and buyers alike have been anxiously tracking the recent spate of interest rate hikes, with most analysts correctly predicting another hike, albeit a tad too optimistically, of 0.25% this March, which in fact turned out to be a surprising 0.50%, which brought the repo rate to 7.75%. While the general consensus is that the rate hiking cycle will likely come to an end hereafter, the cumulative effect of recent hikes has placed a serious burden on homeowners, as well as potential buyers, specifically in the affordable housing segment.

“For most South Africans, home ownership not only provides a sense of security, but remains the single biggest source of wealth creation. Nowhere is this truer than for first time buyers looking to get a foothold in the property market, especially at the lower end of the market”, shares Vuyiswa Ramokgopa, chairperson of the National Property Practitioners Council (NPPC).

The February FNB Residential Property Barometer indicated that the R500k-R750k price bracket was the most active during the fourth quarter of 2022, with the bulk of sales happening in the Western Cape, followed by the Eastern Cape, Gauteng and KZN.

Unfortunately, the same report indicates that an estimated 30% of sales in the affordable market segment were attributed to financial pressure. This indicates the impact of the sharp increase in debt servicing costs, which should have a more pronounced impact on lower-income households.

“While there are many economic arguments for the recent hiking cycle, the bottom line is that homeowners in the affordable market segment are feeling the pressure to make ends meet, pressure that will only increase if the expect hike happens next week. One can expect to see more sales within this sector of the market and ask where these homeowners will end up. Will they have to return to the rental market, having been set back years in terms of their homeownership goals?”, asks Ramokgopa, “What about first-time buyers in this market segment, will they hold on to their deposits until the repo rate goes down again, thereby contributing to the decline of market activity?”

Large economic decisions have far-reaching implications, particularly for homeowners who feel the pinch of high inflation and the resulting measures to contain it, not only in their pockets, but their homes as well. “The City of Cape Town has passed a 52% rates relief increase for all residential properties under R5 million, saying it would alleviate the pressure on lower and middle-income ratepayers. One wonders whether this is something that could be applied in other parts of the country as well to provide much needed relief these ratepayers that are hit the hardest?”, Ramokgopa wonders.

Estate Agency Leaders Share Their Insights

Dr Andrew Golding, chief executive of the Pam Golding Property group: “A pause in the upward cycle would have allowed some breathing space and stimulated positive market sentiment.

While higher-than-anticipated inflation (7% Feb 2023) was a contributory factor, this ninth increase today, is a bitter pill for households and businesses with mortgages and credit finance – especially SMME’s – all of whom are already dealing with the significant economic impact of ongoing loadshedding.

Against the backdrop of a global economy still normalising from the effects of the pandemic and the outbreak of the first major war in Europe since WW2, which has impacted the rest of the globe due to globalisation of energy and food markets, as well as the recent turmoil in the global banking sector, some analysts feel there may be yet another interest rate hike before it stabilises.

That being said, a number of key factors have ensured that, while slowing in the face of a variety of economic headwinds, activity in the housing market has remained surprisingly resilient due to the banks’ ongoing appetite to extend mortgages to home buyers, including first-time purchasers, coupled with the relocation of homeowners from the interior to the coastal provinces – the Western Cape in particular. In addition, homes nationally change hands daily among those relocating, upsizing and downsizing for a variety of the usual reasons according to lifestyle and life stage changes – all of which has resulted in sustained activity in the residential property market.

Dr Andrew Golding

Dr Andrew Golding, chief executive of the Pam Golding Property group

Samuel Seeff, chairman of the Seeff Property Group: The property market is mindful that the SARB faced a difficult decision. The Eskom energy crisis, weak business confidence, deterioration of the CPI inflation to 7% in February (from 6.9% in January), and pressure on the currency left little room to manoeuvre.

That said, we believe the 50bps is a bit steep, and the SARB could have kept it to 25bps. Nonetheless, the hike was largely expected and already factored in by the market.

While overall sales volumes have declined compared to the highs of 2021, Seeff says it remains business as usual with buying and selling continuing daily. The monthly transfers also still are slightly ahead of the pre-pandemic levels.

Although price appreciation continues to decline, standing at around 2% on average, the flat growth means that prices are unlikely to plummet compared to other global markets that experienced runaway price growth during the Covid-boom.

Another positive for the market is that the banks are not reporting any significant spike in financial distress. Competition among the banks means that deposit requirements are generally still below 10% and approval rates at well over 80%. This too is significantly better compared to the post-2009 period.

FNB for example recently reported that selling due to semigration for better service delivery and quality of life still seems to outpace financial related selling in the market.

Samuel Seeff

Samuel Seeff, chairman of the Seeff Property Group

Herschel Jawitz, CEO Jawitz Properties: On a one-million-rand bond, the monthly repayments will increase by R341. However, since the start of the rate-hiking cycle, rates have increased by more than 50%, from 7% to 11,25%. On the same one-million-rand bond, the repayments have increased from R7,753 to R10,493 per month. That’s an increase of 35% in after tax money which is significant.

Homeowners who are under pressure to make their bond repayments should contact their bank and find ways to reduce their expenses, if possible, to avoid at all costs being forced to sell or even defaulting. This is not an ideal environment to sell a property under pressure, especially if you have a large bond relative to the market value of your home. For buyers who have the means to buy, the current market is offering good value buying opportunities. In addition, bank lending remains positive, and the rate concession banks are currently offering are very competitive.

Herschel Jawitz

Herschel Jawitz, CEO Jawitz Properties

Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa: Goslett encourages real estate professionals that they be mindful of the current circumstances and remain sensitive to the fact that things might be tight for some homeowners following this announcement. “Now more so than ever before, it is important to act as a trusted advisor to your clients and to be respectful of their circumstances. It might be a sensitive topic for many homeowners so avoid being too pushy or aggressive in your marketing strategies or you might end up losing more clients than you will gain,” he suggests.

Currently, despite the series of interest rate hikes, Goslett notes that the property market as a whole continues to be active, although somewhat less active than it was during COVID. “People have continued to buy, sell, and rent properties despite the higher interest rates. The South African property market remains more resilient than I could accurately predict. My expectation following this latest hike is that, while it will be challenging for some to adjust to the higher repayments, the property market in general will weather this storm; a home priced at fair market value will still sell timeously and at full value if marketed by a reliable professional,” he concludes.

Adrian Goslett

Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa

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